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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-QSB

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2002

Commission File No. 0-24557

CARDINAL FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)

Virginia
(State or other jurisdiction of
incorporation or organization)
  54-1874630
(I.R.S. Employer
Identification No.)

10555 Main Street, Suite 500, Fairfax, Virginia, 22030
(Address of principal executive offices)

Issuer's telephone number including area code: (703) 934-9200

Indicate by check mark whether the Registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months Yes ý    No

On November 12, 2002, there were 10,044,345 shares of Cardinal Financial Corporation Common Stock, par value $1.00 per share, outstanding.

Transitional Small Business Disclosure Format: Yes    No ý





CARDINAL FINANCIAL CORPORATION

INDEX TO FORM 10-QSB

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited):

 

 

 

 

Consolidated Statements of Condition
September 30, 2002 and December 31, 2001

 

1

 

 

Consolidated Statements of Operations
For the three and nine months ended September 30, 2002 and 2001

 

2

 

 

Consolidated Statements of Comprehensive Income (Loss)
For the three and nine months ended September 30, 2002 and 2001

 

3

 

 

Consolidated Statements of Changes In Shareholders' Equity
For the nine months ended September 30, 2002 and 2001

 

4

 

 

Consolidated Statements of Cash Flows
For the nine months ended September 30, 2002 and 2001

 

5

 

 

Notes to Consolidated Financial Statements

 

6

Item 2.

 

Management's Discussion and Analysis of Financial Condition and Results of Operations

 

11

Item 3.

 

Controls and Procedures

 

26

PART II—OTHER INFORMATION

 

27

Item 1.

 

Legal Proceedings

 

27

Item 2.

 

Changes in Securities

 

27

Item 3.

 

Defaults Upon Senior Securities

 

27

Item 4.

 

Submission of Matters to a Vote of Security Holders

 

27

Item 5.

 

Other Information

 

28

Item 6.

 

Exhibits and Reports on Form 8-K

 

28

SIGNATURES AND CERTIFICATIONS

 

29

i


CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
September 30, 2002 and December 31, 2001
(Dollars in thousands, except share data)

 
  (Unaudited)
September 30,
2002

  December 31,
2001

 
Assets  
Cash and due from banks   $ 25,729   $ 11,446  
Federal funds sold     61,186     23,013  
   
 
 
  Total cash and cash equivalents     86,915     34,459  
Investment securities available-for-sale     137,945     34,147  
Other investments     1,263     1,268  
Loans held for sale         4,732  
Loans receivable, net of fees     216,355     200,911  
Allowance for loan losses     (3,073 )   (3,104 )
   
 
 
      213,282     197,807  
Premises and equipment, net     4,610     5,077  
Goodwill and other intangibles     646     668  
Accrued interest and other assets     2,141     1,426  
   
 
 
  Total assets   $ 446,802   $ 279,584  
   
 
 
Liabilities and Shareholders' Equity  
Deposits   $ 403,668   $ 246,024  
Other borrowed funds     1,000     9,824  
Accrued interest and other liabilities     1,404     3,112  
   
 
 
  Total liabilities     406,072     258,960  
Preferred stock, $1 par value, 10,000,000 shares authorized Series A preferred stock, cumulative convertible, 1,364,686 and 1,364,714 shares outstanding in 2002 and 2001, respectively     1,365     1,365  
Common stock, $1 par value, 50,000,000 shares authorized, 10,044,345 and 4,294,323 shares outstanding in 2002 and 2001, respectively     10,044     4,294  
Additional paid-in capital     51,231     38,488  
Accumulated deficit     (24,358 )   (23,249 )
Accumulated other comprehensive income (loss)     2,448     (274 )
   
 
 
  Total shareholders' equity     40,730     20,624  
   
 
 
  Total liabilities and shareholders' equity   $ 446,802   $ 279,584  
   
 
 

See accompanying notes to consolidated financial statements.

1


CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three and nine months ended September 30, 2002 and 2001
(Dollars in thousands, except per share data)
(Unaudited)

 
  Three Months Ended
September 30,

  Nine Months Ended
September 30,

 
 
  2002
  2001
  2002
  2001
 
Interest income:                          
  Loans receivable   $ 3,737   $ 3,879   $ 10,967   $ 11,074  
  Federal funds sold     260     218     613     926  
  Investment securities available-for-sale     1,471     95     3,284     285  
  Other investments     17     22     53     66  
   
 
 
 
 
    Total interest income     5,485     4,214     14,917     12,351  
Interest expense:                          
  Deposits     2,603     1,703     6,834     5,335  
  Other borrowed funds     40     122     208     368  
   
 
 
 
 
    Total interest expense     2,643     1,825     7,042     5,703  
   
 
 
 
 
    Net interest income     2,842     2,389     7,875     6,648  
Provision for loan losses     95     190     134     375  
   
 
 
 
 
    Net interest income after provision for loan losses     2,747     2,199     7,741     6,273  
Non-interest income:                          
  Service charges on deposit accounts     133     102     363     271  
  Loan service charges     91     144     286     349  
  Investment fee income     188     472     754     1,560  
  Net gain on sales of loans     3     2     50     14  
  Net gain on investment securities available-for-sale     121         121      
  Net gain on sales of other assets         1     39     5  
  Other income     192     133     553     277  
   
 
 
 
 
    Total non-interest income     728     854     2,166     2,476  
Non-interest expense:                          
  Salary and benefits     1,368     1,963     4,176     5,801  
  Occupancy     367     344     1,002     1,027  
  Professional fees     235     192     727     450  
  Depreciation     176     210     555     596  
  Writedown on WorldCom bond             1,660      
  Amortization of intangibles         173     22     523  
  Other operating expenses     900     877     2,503     2,626  
   
 
 
 
 
    Total non-interest expense     3,046     3,759     10,645     11,023  
   
 
 
 
 
    Net income (loss) before income taxes     429     (706 )   (738 )   (2,274 )
Provision for income taxes                  
   
 
 
 
 
Net income (loss)   $ 429   $ (706 ) $ (738 ) $ (2,274 )
   
 
 
 
 
Dividends to preferred shareholders     124     128     371     384  
   
 
 
 
 
Net income (loss) to common shareholders   $ 305   $ (834 ) $ (1,109 ) $ (2,658 )
   
 
 
 
 
Basic and diluted earnings (loss) per common share   $ 0.03   $ (0.20 ) $ (0.15 ) $ (0.62 )
   
 
 
 
 
Weighted-average common shares outstanding — basic     10,044,345     4,256,797     7,243,053     4,255,432  
   
 
 
 
 
Weighted-average common shares outstanding — diluted     10,142,930     4,256,797     7,243,053     4,255,432  
   
 
 
 
 

See accompanying notes to consolidated financial statements.

2


CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
For the three and nine months ended September 30, 2002 and 2001
(Dollars in thousands)
(Unaudited)

 
  Three Months Ended
September 30,

  Nine Months Ended
September 30,

 
 
  2002
  2001
  2002
  2001
 
Net income (loss)   $ 429   $ (706 ) $ (738 ) $ (2,274 )
Other comprehensive income:                          
  Unrealized gain on available-for-sale investment securities     1,581     62     2,722      
   
 
 
 
 
Comprehensive income (loss)   $ 2,010   $ (644 ) $ 1,984   $ (2,274 )
   
 
 
 
 

See accompanying notes to consolidated financial statements.

3


CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the nine months ended September 30, 2002 and 2001
(Dollars in thousands)
(Unaudited)

 
  Preferred
Shares

  Preferred
Stock

  Common
Shares

  Common
Stock

  Additional
Paid-in
Capital

  Accumulated
Deficit

  Accumulated
Other
Comprehensive
Income (Loss)

  Total
 
Balance, December 31, 2000   1,411   $ 1,411   4,253   $ 4,253   $ 38,466   $ (10,022 ) $ 4   $ 34,112  
Issuance of stock awards         3     3     3             6  
Stock options exercised         1     1     3             4  
Dividends on preferred stock                     (384 )       (384 )
Net loss                     (2,274 )       (2,274 )
   
 
 
 
 
 
 
 
 
Balance, September 30, 2001   1,411   $ 1,411   4,257   $ 4,257   $ 38,472   $ (12,680 ) $ 4   $ 31,464  
   
 
 
 
 
 
 
 
 
Balance, December 31, 2001   1,365   $ 1,365   4,294   $ 4,294   $ 38,488   $ (23,249 ) $ (274 ) $ 20,624  
Dividends on preferred stock                     (371 )       (371 )
Rights offering shares issued         2,437     2,437     5,462             7,899  
Public offering shares issued         3,313     3,313     7,281             10,594  
Change in unrealized gain on investment securities available-for-sale                         2,722     2,722  
Net loss                     (738 )       (738 )
   
 
 
 
 
 
 
 
 
Balance, September 30, 2002   1,365   $ 1,365   10,044   $ 10,044   $ 51,231   $ (24,358 ) $ 2,448   $ 40,730  
   
 
 
 
 
 
 
 
 

See accompanying notes to consolidated financial statements.

4


CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended September 30, 2002 and 2001
(Dollars in thousands)
(Unaudited)

 
  2002
  2001
 
Cash flows from operating activities:              
  Net loss   $ (738 ) $ (2,274 )
  Adjustments to reconcile net loss to net cash provided by (used in) operating activities:              
    Depreciation     555     596  
    Amortization of intangibles, premiums and discounts     626     548  
    Provision for loan losses     134     375  
    Originations of loans held for sale     (4,369 )    
    Proceeds from the sale of loans held for sale     9,038      
    Writedown on WorldCom bond     1,660      
    Gain on sale of loans held for sale     (50 )   (14 )
    Gain on sale of investment securities available-for-sale     (121 )    
    Gain on sale of other assets     (39 )   (5 )
    Increase in accrued interest and other assets     (715 )   (125 )
    Increase (decrease) in accrued interest and other liabilities     (1,708 )   889  
    Compensation related to stock awards         6  
   
 
 
      Net cash provided by (used in) operating activities     4,273     (4 )
   
 
 
Cash flows from investing activities:              
  Purchase of premises and equipment     (88 )   (412 )
  Proceeds from sale of premises and equipment         12  
  Proceeds from sale, maturity and call of investment securities available-for-sale     16,053     4,500  
  Proceeds from sale of other investments     188     349  
  Purchase of investment securities available-for-sale     (131,129 )   (3,601 )
  Purchase of other investments     (184 )   (114 )
  Redemptions of investment securities available-for-sale     11,736     1,043  
  Net increase in loans receivable     (15,335 )   (42,448 )
   
 
 
      Net cash used in investing activities     (118,759 )   (40,671 )
   
 
 
Cash flows from financing activities:              
  Net increase in deposits     157,644     49,279  
  Net increase (decrease) in other borrowed funds     (8,824 )   4,069  
  Proceeds from rights offering     7,899      
  Proceeds from public offering     10,594      
  Dividends on preferred stock     (371 )   (384 )
  Stock options exercised         4  
   
 
 
      Net cash provided by financing activities     166,942     52,968  
   
 
 
Net increase in cash and cash equivalents     52,456     12,293  
Cash and cash equivalents at beginning of period     34,459     29,488  
   
 
 
Cash and cash equivalents at end of period   $ 86,915   $ 41,781  
   
 
 
Supplemental disclosure of cash flow information:              
    Cash paid during period for interest   $ 6,947   $ 5,693  
   
 
 

See accompanying notes to consolidated financial statements.

5



CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002
(Unaudited)

Note 1

Organization

        Cardinal Financial Corporation (the "Company") was incorporated November 24, 1997 under the laws of the Commonwealth of Virginia as a holding company whose activities consist of investment in its wholly-owned subsidiaries. In addition to Cardinal Bank, N.A., which began operations in 1998, the Company opened the following three subsidiaries in 1999: Cardinal Wealth Services, Inc., an investment subsidiary (as of February 1, 1999); Cardinal Bank—Manassas/Prince William, N.A. (as of July 26, 1999); and Cardinal Bank—Dulles, N.A. (as of August 2, 1999). On September 1, 2000, the Company completed its acquisition of Heritage Bancorp, Inc. and its banking subsidiary, The Heritage Bank, headquartered in McLean, Virginia. The Heritage Bank was renamed and became the Company's fourth banking subsidiary, Cardinal Bank—Potomac. On November 1, 2001, the Company consolidated two of its banking subsidiaries, Cardinal Bank—Dulles, N.A. and Cardinal Bank—Potomac, into Cardinal Bank, N.A. On March 1, 2002, the Company consolidated Cardinal Bank—Manassas/ Prince William, N.A. into Cardinal Bank, N.A., now the Company's only remaining banking subsidiary.

Basis of Presentation

        In the opinion of management, the accompanying consolidated financial statements have been prepared in accordance with the requirements of Regulation S-X, Article 10. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. However, all adjustments that are, in the opinion of management, necessary for a fair presentation have been included. The results of operations for the three and nine months ended September 30, 2002 are not necessarily indicative of the results to be expected for the full year ending December 31, 2002. The unaudited interim financial statements should be read in conjunction with the audited financial statements and notes to financial statements that are presented in the Company's Annual Report on Form 10-KSB for the year ended December 31, 2001.

Note 2

Segment Disclosures

        The Company operates and reports in two business segments, banking and investment advisory services. The banking segment includes both commercial and consumer lending and provides customers products such as commercial loans, real estate loans, other business financing and consumer loans. In addition, this segment also provides customers with several choices of deposit products, including demand deposit accounts, savings accounts and certificates of deposit. The investment advisory services segment provides advisory services to businesses and individuals, including financial planning and retirement/estate planning.

6



        Information about reportable segments, and reconciliation of such information to the consolidated financial statements as of and for the three and nine months ended September 30, 2002 and 2001, follows:

For the Three Months Ended September 30, 2002:

 
  Banking
  Investment
Advisory

  Intersegment
Elimination

  Other
  Consolidated
 
  (Dollars in thousands)

Net interest income   $ 2,810   $   $   $ 32   $ 2,842
Provision for loan losses     95                 95
Non-interest income     505     188         35     728
Non-interest expense     2,725     223         98     3,046
   
 
 
 
 
Net income (loss)   $ 495   $ (35 ) $   $ (31 ) $ 429
   
 
 
 
 
Total Assets   $ 443,511   $ 332   $ (38,192 ) $ 41,151   $ 446,802

For the Nine Months Ended September 30, 2002:

 
  Banking
  Investment
Advisory

  Intersegment
Elimination

  Other
  Consolidated
 
 
  (Dollars in thousands)

 
Net interest income   $ 7,824   $   $   $ 51   $ 7,875  
Provision for loan losses     134                 134  
Non-interest income     1,244     756         166     2,166  
Non-interest expense     9,246     914         485     10,645  
   
 
 
 
 
 
Net loss   $ (312 ) $ (158 ) $   $ (268 ) $ (738 )
   
 
 
 
 
 
Total Assets   $ 443,511   $ 332   $ (38,192 ) $ 41,151   $ 446,802  

For the Three Months Ended September 30, 2001:

 
  Commercial
Banking

  Investment
Advisory

  Intersegment
Elimination

  Other
  Consolidated
 
 
  (Dollars in thousands)

 
Net interest income   $ 2,387   $   $   $ 2   $ 2,389  
Provision for loan losses     190                 190  
Non-interest income     350     474         30     854  
Non-interest expense     2,671     480         608     3,759  
   
 
 
 
 
 
Net loss   $ (124 ) $ (6 ) $   $ (576 ) $ (706 )
   
 
 
 
 
 
Total Assets   $ 255,252   $ 421   $ (29,355 ) $ 32,319   $ 258,637  

For the Nine Months Ended September 30, 2001:

 
  Commercial
Banking

  Investment
Advisory

  Intersegment
Elimination

  Other
  Consolidated
 
 
  (Dollars in thousands)

 
Net interest income   $ 6,623   $   $   $ 25   $ 6,648  
Provision for loan losses     375                 375  
Non-interest income     875     1,564         37     2,476  
Non-interest expense     7,761     1,597         1,665     11,023  
   
 
 
 
 
 
Net loss   $ (638 ) $ (33 ) $   $ (1,603 ) $ (2,274 )
   
 
 
 
 
 
Total Assets   $ 255,252   $ 421   $ (29,355 ) $ 32,319   $ 258,637  

7


        The Company does not have operating segments other than those reported. Parent Company financial information is included in the Other category above and represents the overhead function rather than an operating segment. Parent Company's net interest income is comprised of interest income from federal funds sold and investment securities.

Note 3

Earnings (Loss) Per Common Share

        The following discloses the calculation of basic and diluted earnings (loss) per common share for the three and nine months ended September 30, 2002 and 2001. Stock options outstanding as of September 30, 2002 and 2001 are 573,073 and 378,678, respectively. Stock options issued, which were not included in the calculation of diluted earnings per share because the options' exercise prices were greater than the average market price, were 474,488 for the three months ended September 30, 2002. Because the Company has net losses for the nine months ended September 30, 2002 and for the three months and nine months ended September 30, 2001, all stock options issued have an anti-dilutive effect and, therefore, have been excluded from the earnings per share calculation for those respective periods.

 
  Three Months Ended
September 30,

 
 
  2002
  2001
 
 
  (Dollars in thousands)

 
Net income (loss)   $ 429   $ (706 )
Dividends to preferred shareholders     124     128  
   
 
 
Net income (loss) to common shareholders     305     (834 )
Weighted average common shares for basic calculation     10,044,345     4,256,797  
Weighted average common shares for diluted calculation     10,142,930     4,256,797  
Basic and diluted earnings (loss) per common share   $ 0.03   $ (0.20 )

 


 

Nine Months Ended
September 30,


 
 
  2002
  2001
 
 
  (Dollars in thousands)

 
Net loss   $ (738 ) $ (2,274 )
Dividends to preferred shareholders     371     384  
   
 
 
Net loss to common shareholders     (1,109 )   (2,658 )
Weighted average common shares for basic and diluted calculation     7,243,053     4,255,432  
Basic and diluted loss per common share   $ (0.15 ) $ (0.62 )

8


Note 4

Adoption of New Accounting Standards

        In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 discontinues the practice of amortizing goodwill and requires that goodwill be evaluated at least annually for impairment by comparing its fair value with its recorded amount and written down when appropriate. SFAS No. 142 requires that other intangible assets that have been separately identified and accounted for continue to be amortized over a determinable useful life. SFAS No. 142 also requires disclosure of the changes in the carrying amounts of goodwill from period to period, the carrying amounts of intangible assets by major intangible asset class for those subject to and not subject to amortization, and the estimated intangible asset amortization expense for the next five years. The Company adopted SFAS No. 142 as of January 1, 2002, and, therefore, discontinued the amortization of goodwill on January 1, 2002. The Company has evaluated goodwill for impairment as specified under SFAS No. 142 and determined that goodwill under this statement is not impaired. Information on the Company's intangible assets is contained in the table below.

 
  September 30, 2002
  December 31, 2001
 
 
  Gross
Carrying Value

  Accumulated
Amortization

  Gross
Carrying Value

  Accumulated
Amortization

 
 
  (Dollars in thousands)

 
Amortizable core deposit intangible   $ 102   $ (102 ) $ 102   $ (80 )
Unamortizable goodwill (1)     646         646      

 

 

Core Deposit
Intangible


 

Goodwill

Amortization expense:            
Three months ended September 30, 2002   $   $
Nine months ended September 30, 2002     22    

Three months ended September 30, 2001

 

$

15

 

$

158
Nine months ended September 30, 2001     45     478

Estimated amortization expense:

 

 

 

 

 

 
Three months ended December 31, 2002   $   $
For the years ended December 31,            
2003        
2004        
2005        
2006        
2007        

9



 


 

Three months ended
Sept. 30,


 

Nine months ended
Sept. 30,


 
 
  2002
  2001
  2002
  2001
 
Reported net income (loss) to common shareholders   $ 305   $ (834 ) $ (1,109 ) $ (2,658 )
Add: goodwill amortization         158         478  
   
 
 
 
 
Adjusted net income (loss)     305     (676 )   (1,109 )   (2,180 )

Reported basic and diluted earnings (loss) per share

 

$

0.03

 

$

(0.20

)

$

(0.15

)

$

(0.62

)
Add: goodwill amortization per share         0.04         0.11  
   
 
 
 
 
Adjusted basic and diluted earnings (loss) per share   $ 0.03   $ (0.16 ) $ (0.15 ) $ (0.51 )

(1)
In December 2001, the Company wrote down goodwill by $8.3 million.

10



Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

General

        The following presents management's discussion and analysis of our consolidated financial condition as of September 30, 2002 and December 31, 2001 and results of operations for the three and nine months ended September 30, 2002 and September 30, 2001. This discussion should be read in conjunction with our unaudited consolidated financial statements and the notes thereto appearing elsewhere in this report.

Critical Accounting Policies; Allowance for Loan Losses

        Our policy for the allowance for loan loss calculation is to maintain the allowance at a level that represents the best estimate of known and inherent losses in the loan portfolio. Both the amount of the provision and the level of the allowance for loan losses are impacted by many factors, including general economic conditions, actual and expected credit losses, historical trends and specific conditions of the individual borrower. As a part of our analysis, we use comparative peer group data, duration factors and qualitative factors to support our estimates. The loan loss provision was $95,000 and $134,000 for the three and nine months ended September 30, 2002 and $190,000 and $375,000 for the three and nine months ended September 30, 2001. The allowance for loan losses decreased slightly to $3.07 million as of September 30, 2002 from $3.10 million at December 31, 2001. The ratio of the allowance for loan losses to gross loans at September 30, 2002 was 1.42% compared to 1.55% at December 31, 2001. Additional information on the allowance for loan losses and provision expense can be found below under "Results of Operations".

        Credit losses are an inherent part of our business. Although we believe the methodologies for determining the allowance for loan losses and the current level of the allowance are adequate, it is possible that there may be unidentified losses in the portfolio that may become evident only at a future date. Additional provisions for such losses, if necessary, would negatively impact earnings and would be recorded in the Commercial Banking segment.

        We categorize our loans into one of five pools: commercial and industrial, commercial real estate, home equity lines of credit, residential mortgages, and consumer loans. Peer group annual loss factors are applied to all pools and are adjusted by the projected duration of the loan pool and by the qualitative factors mentioned above. The indicated loss factors resulting from this analysis are applied to each of the loan pools to determine a reserve level for each of the five pools of loans. In addition, we individually assign loss factors to all loans that have been identified as having loss attributes, as indicated by deterioration in the financial condition of the borrower or a decline in underlying collateral values. Since we have limited historical data on which to base loss factors for classified loans, we apply a 5% loss factor to all special mention loans and a 15% loss factor to all substandard loans (in accordance with regulatory guidelines).

Financial Condition

        Total assets were $446.8 million at September 30, 2002 compared to $279.6 million at December 31, 2001, an increase of $167.2 million or 59.8% due primarily to higher cash equivalents and investments. Investment securities available-for-sale increased by $103.8 million to $137.9 million at September 30, 2002 compared to $34.1 million at December 31, 2001 (see Table 1 for details of the investment securities available-for-sale portfolio). Loans receivable, net of fees, increased by $15.5 million to $216.4 million at September 30, 2002 from $200.9 million at December 31, 2001 (see Table 2 for loan portfolio details). Total deposits increased by $157.7 million to $403.7 million at September 30, 2002 compared to $246.0 million at December 31, 2001 (see Table 3 for certificates of deposit of $100,000 or more) and total borrowings decreased by $8.8 million to $1.0 million at September 30, 2002 from $9.8 million at December 31, 2001. Deposits increased primarily in the retail

11



money market accounts and certificates of deposit categories due to the results of our advertising program. Total cash and cash equivalents increased to $86.9 million at September 30, 2002 from $34.5 million at December 31, 2001. The increase in cash and cash equivalents was primarily the result of increased deposit balances not yet invested as loans or securities by September 30, 2002. Shareholders' equity at September 30, 2002 was $40.7 million compared to $20.6 million at December 31, 2001, due primarily to our successful second quarter 2002 stock rights and public offerings which raised $18.5 million in new capital. Changes in the unrealized gain on investment securities portfolio amounting to $2.7 million more than offset the dividends on preferred stock and the net loss for the period. Book value per common share on September 30, 2002 was $3.38 compared to $3.21 on December 31, 2001.

Results of Operations

        Net income before preferred dividends for the three months ended September 30, 2002 was $429,000, an improvement of $1,135,000 when compared to the same period of 2001, due to the impact of higher earning assets and reduced operating expenses. Net loss before preferred dividends for the nine months ended September 30, 2002 was $738,000, an improvement of $1,536,000 compared to the same period of the 2001. Our writedown of $1,660,000 of a Worldcom bond in the second quarter contributed to the loss for the nine months ended September 30, 2002.

        Dividends to preferred shareholders were $124,000 and $371,000 for the three and nine months ended September 30, 2002 compared to $128,000 and $384,000 for the same periods in 2001. Net income to common shareholders for the three months ended September 30, 2002 was $305,000 and the net loss to common shareholders was $1,109,000 for the nine months ended September 30, 2002, as compared to losses of $834,000 and $2,658,000, respectively, for the three and nine months ended September 30, 2001. Basic and diluted earnings per common share increased by $0.23 per common share to $0.03 as compared to a loss of $0.20 for the three months ended September 30, 2002 and 2001, respectively. Basic and diluted loss per common share for the nine months ended September 30, 2002 was $0.15, an improvement of $0.47 when compared to the nine months ended September 30, 2001.

        Return on average assets for the three and nine months ended September 30, 2002 was 0.41% and (0.27%), respectively, compared to (1.15%) and (1.30%) for the three and nine months ended September 30, 2001, respectively. Return on average equity for the three and nine months ended September 30, 2002 was 4.33% and (3.25%), respectively, compared to (8.77%) and (9.20%) for the three and nine months ended September 30, 2001, respectively.

        Net interest income is our primary source of revenue and represents the difference between interest and fees earned on interest-bearing assets and the interest paid on deposits and other interest-bearing liabilities. Net interest income for the three months ended September 30, 2002 was $2,842,000 compared to $2,389,000 for the same period ended September 30, 2001, an increase of 19.0%. Net interest income for the nine months ended September 30, 2002 was $7,875,000 compared to $6,648,000 of the same period ended September 30, 2001, an increase of 18.5% due primarily to the impact of higher earning assets.

        Our net interest margin for the three and nine months ended September 30, 2002 was 2.86% and 3.05%, respectively, as compared to 4.34% and 4.26% for the three and nine months ended September 30, 2001, respectively. The decrease in the margin can be attributed to the change in the mix of earning assets towards lower yielding investments, and also to the mix of interest-bearing liabilities and lower overall interest rates between September 2001 and September 2002. Tables 4, 4a, 5 and 5a present an analysis of average interest-earning assets, interest-bearing liabilities and demand deposits with the related components of interest income and interest expense.

12



        Provision for loan losses for the three and nine months ended September 30, 2002 was $95,000 and $134,000, respectively, as compared to a provision of $190,000 and $375,000 for the three and nine months ended September 30, 2001. The decrease in provision is primarily driven by the reduction in our commercial loan portfolios and increases in our residential real estate loans and refinement of our loan loss reserve methodology during the fourth quarter of 2001. Our allowance for loan losses at September 30, 2002 was $3.07 million compared to $3.10 million at December 31, 2001. The ratio of the allowance for loan losses to total loans at September 30, 2002 was 1.42% compared to a ratio of 1.55% at December 31, 2001. Tables 6 and 7 portray the components and the allocation of the allowance for loan losses.

        Non-interest income for the three months ended September 30, 2002 was $728,000 compared to $854,000 for the three months ended September 30, 2001, a decrease of 14.8%. For the nine months September 30, 2002, non-interest income was $2,166,000 compared to $2,476,000 for the same period ended September 30, 2001, a decrease of 12.5%. The decrease in non-interest income was primarily due to decreases in investment fee income of $284,000 and $806,000, respectively, for the three and nine months ended September 30, 2002 as compared to the three and nine months ended September 30, 2001. These decreases were partially offset by gains on investment securities and increases in service charges on deposit accounts and rental income from the subleases of excess space in various locations.

        Non-interest expense for the three and nine months ended September 30, 2002 totaled $3,046,000 and $10,645,000 compared to $3,759,000 and $11,023,000 for the three and nine months ended September 30, 2001, due primarily to lower staff related expenses. Due to the adoption of SFAS No. 142, amortization of intangibles decreased by $173,000 for the three months ended September 30, 2002 compared to the same period in 2001 and by $501,000 for the year to date September 30, 2002 compared to the year to date September 30, 2001.

        We have not recorded income tax expense or benefit due to the existence of net losses for the nine months ended September 30, 2002 and all prior years of operations. We have net deferred tax assets, including net operating loss carryforwards, all of which have a full valuation allowance as of September 30, 2002. A valuation allowance is established against a deferred tax asset when, in the judgment of management, it is more likely than not that such deferred tax assets will be realized. The benefit of our deferred tax assets will only be recognized when it becomes more likely than not that they will be realized.

Business Segment Operations

        We provide banking and non-banking financial services and products through our subsidiaries. Management operates and reports on the results of our operations through two business segments, banking and investment advisory services.

Banking

        The banking segment provides comprehensive banking services to small businesses and individuals through multiple delivery channels. Services offered include commercial and consumer lending, deposit products, direct banking via the internet or telephone, and the funding of small business receivables through the Business Manager product.

        For the three months ended September 30, 2002 the commercial banking segment had net income of $495,000 and for the nine months ended September 30, 2002 net losses of $312,000, compared to net losses of $124,000 and $638,000 for the three and nine months ended September 30, 2001. The improvement in earnings is a result of higher earning assets and lower operating expenses. As of September 30, 2002, total assets were $443.5 million, while loans receivable, net of fees, were

13



$216.4 million and deposits were $403.7 million. As of September 30, 2001, total assets were $255.3 million, loans receivable, net of fees, were $196.7 million and deposits were $212.7 million.

Investment Advisory Services

        The investment advisory services segment offers financial and estate planning services, centered on a group of products provided through a strategic alliance with Legg Mason Financial Partners, a wholly owned subsidiary of Legg Mason, Inc. Operations for this segment began February 1, 1999.

        For the three and nine months ended September 30, 2002, the investment advisory services segment had net losses of $35,000 and $158,000, respectively. As of September 30, 2002, total assets were $332,000 and total assets under management were $102.2 million. For the three months ended September 30, 2001, the net loss was $6,000 and for the nine months ended September 30, 2001, the net loss was $33,000. As of September 30, 2001, total assets were $421,000 and total assets under management were $133.8 million. Fee income for the three and nine months ended September 30, 2002 decreased as compared to the same three and nine month period of 2001, due primarily to reduced transaction activity.

Capital Resources

        Shareholders' equity at September 30, 2002 was $40.7 million compared to $20.6 million at December 31, 2001. During the second quarter of 2002, we completed a stock rights and public offerings which raised $18.5 million in new capital and increased the total number of outstanding shares to 10,044,345 at September 30, 2002 as compared to 4,294,323 at December 31, 2001. Changes in the unrealized gain on investment securities portfolio totaling $2.7 million more than offset dividends paid on preferred stock and the net loss for the period. At September 30, 2002, our tier 1 and total risk-based capital ratios were 14.0% and 15.2%, respectively. At December 31, 2001, our tier 1 and total risk-based capital ratios were 9.0% and 10.4%, respectively. Table 8 provides additional information on our capital resources.

Liquidity

        Liquidity management is an important element in determining our ability to meet normal deposit withdrawals while also providing for the credit needs of customers. At September 30, 2002, cash and cash equivalents and investment securities available-for-sale totaled $224.9 million or 50.3% of total assets compared to $68.6 million or 24.5% of total assets at December 31, 2001. The improvement in liquidity as compared to prior year is due to the availability of funds from the recent capital raising, as well as higher deposit levels resulting from our advertising program. Management is committed to maintaining liquidity at a level sufficient to protect depositors, provide for reasonable growth, and fully comply with all regulatory requirements.

Interest Rate Sensitivity

        Asset/liability management involves the monitoring of our sensitivity to interest rate movements. In order to measure the effect of interest rates on our net interest income, management takes into consideration the expected cash flows from the loan and securities portfolios and the expected magnitude of the repricing of specific asset and liability categories. Management evaluates interest sensitivity risk and then formulates guidelines to manage this risk based upon its outlook regarding the economy, forecasted interest rate movements and other business factors. Management's goal is to maximize and stabilize the net interest margin by limiting exposure to interest rate changes.

        The data in Table 9 reflects the repricing or expected maturities of various assets and liabilities as of September 30, 2002. This "gap" analysis represents the difference between interest sensitive assets and liabilities in a specific time interval. The interest sensitivity gap analysis presents a position that

14



existed at one particular point in time, and assumes that assets and liabilities with similar repricing characteristics will reprice at the same time and to the same degree.

Forward Looking Statements

        This Quarterly Report on Form 10-QSB contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements are not historical facts, but rather are predictions and generally can be identified by use of statements that include phrases such as "believe," "expect," "anticipate," "estimate," "intend," "plan," "foresee" or other words or phrases of similar import. Similarly, statements that describe our future financial condition or results of operations, objectives, strategies, plans, goals or future performance and business also are forward-looking statements. These forward-looking statements involve known and unknown risks, uncertainties and other factors that could cause our actual results to differ materially from those currently anticipated in these forward-looking statements. In light of these risks and uncertainties, the forward-looking events might or might not occur.

        Important factors that could cause actual results to differ materially from those suggested by these forward-looking statements, and could adversely affect our future financial performance, include those referred to in our Annual Report on Form 10-KSB for the year ended December 31, 2001.

15


Table 1.

Cardinal Financial Corporation and Subsidiaries
Investment Securities Available-for-Sale
As of September 30, 2002 and December 31, 2001
(Dollars in thousands)

 
  Par Value
  Amortized
Cost

  Fair
Value

  Unrealized
Gain/(Loss)

  Average
Yield

 
As of September 30, 2002                              
U.S. government agencies and enterprises                              
  One to five years   $ 23,000   $ 22,988   $ 23,256   $ 268   3.90 %
   
 
 
 
 
 
    Total U.S. government agencies   $ 23,000   $ 22,988   $ 23,256   $ 268   3.90 %
Mortgage-backed securities                              
  Within one year   $ 3,784   $ 3,841   $ 3,884   $ 43   3.61 %
  One to five years     97,595     99,386     101,458     2,072   5.16 %
  Five to ten years     5,962     6,073     6,183     110   5.85 %
  After ten years     342     360     360       9.69 %
   
 
 
 
 
 
    Total mortgage-backed securities   $ 107,683   $ 109,660   $ 111,885   $ 2,225   5.16 %
Corporate bonds                              
  One to five years   $ 2,000   $ 340   $ 260   $ (80 ) 0.00 %
   
 
 
 
 
 
    Total corporate bonds   $ 2,000   $ 340   $ 260   $ (80 ) 0.00 %
   
 
 
 
 
 
Treasury bonds                              
  One to five years   $ 2,500   $ 2,509   $ 2,544   $ 35   2.67 %
   
 
 
 
 
 
    Total treasury bonds   $ 2,500   $ 2,509   $ 2,544   $ 35   2.67 %
   
 
 
 
 
 
    Total investment securities available-for-sale   $ 135,183   $ 135,497   $ 137,945   $ 2,448   4.82 %
   
 
 
 
 
 

 

 

Par Value


 

Amortized
Cost


 

Fair
Value


 

Unrealized
Gain/(Loss)


 

Average
Yield


 
As of December 31, 2001                              
U.S. government agencies and enterprises                              
  One to five years   $ 3,000   $ 2,985   $ 2,950   $ (35 ) 4.15 %
  Five to ten years     1,500     1,516     1,508     (8 ) 4.67 %
   
 
 
 
 
 
    Total U.S. government agencies   $ 4,500   $ 4,501   $ 4,458   $ (43 ) 4.32 %
   
 
 
 
 
 
Mortgage-backed securities                              
  Within one year   $ 182   $ 182   $ 183   $ 1   2.55 %
  One to five years     11,210     11,456     11,383     (73 ) 5.22 %
  Five to ten years     5,804     5,927     5,865     (62 ) 5.79 %
  After ten years     4,849     4,965     4,926     (39 ) 5.96 %
   
 
 
 
 
 
    Total mortgage-backed securities   $ 22,045   $ 22,530   $ 22,357   $ (173 ) 5.51 %
   
 
 
 
 
 
Corporate bonds                              
  One to five years   $ 6,000   $ 6,154   $ 6,114   $ (40 ) 5.42 %
  Five to ten years     1,000     986     969     (17 ) 6.98 %
   
 
 
 
 
 
    Total corporate bonds   $ 7,000   $ 7,140   $ 7,083   $ (57 ) 5.64 %
   
 
 
 
 
 
Treasury bonds                              
  Within one year   $ 250   $ 250   $ 249   $ (1 ) 1.87 %
   
 
 
 
 
 
    Total treasury bonds   $ 250   $ 250   $ 249   $ (1 ) 1.87 %
   
 
 
 
 
 
    Total investment securities available-for-sale   $ 33,795   $ 34,421   $ 34,147   $ (274 ) 5.36 %
   
 
 
 
 
 

16


Table 2.

Cardinal Financial Corporation and Subsidiaries
Loans Receivable
As of September 30, 2002 and December 31, 2001
(Dollars in thousands)

 
  September 30,
2002

  December 31,
2001

 
Commercial   $ 52,717   24.37 % $ 57,665   28.71 %
Real estate—commercial     95,699   44.24 %   87,116   43.37 %
Real estate—construction     6,224   2.88 %   6,397   3.18 %
Real estate—residential     25,329   11.71 %   14,469   7.20 %
Home equity lines     24,776   11.45 %   21,299   10.60 %
Consumer     11,592   5.35 %   13,941   6.94 %
   
 
 
 
 
Gross loans   $ 216,337   100.00 % $ 200,887   100.00 %

Add: unearned income, net

 

 

18

 

 

 

 

24

 

 

 
Less: allowance for loan losses     (3,073 )       (3,104 )    
   
     
     
Total loans, net   $ 213,282       $ 197,807      
   
     
     

Table 3.

Cardinal Financial Corporation and Subsidiaries
Certificates of Deposit of $100,000 or More
As of September 30, 2002
(Dollars in thousands)

 
  September 30,
2002

Maturities:      
Three months or less   $ 8,356
Over three months through six months     8,918
Over six months through twelve months     19,675
Over twelve months     35,634
   
    $ 72,583
   

17


Table 4.

Cardinal Financial Corporation and Subsidiaries
Average Balance Sheets and Interest Rates on Earning Assets and Interest—Bearing Liabilities
For the Three Months Ended September 30, 2002, 2001 and 2000
(Dollars in thousands)

 
  2002
  2001
  2000
 
 
  Average
Balance

  Interest
Income/
Expense

  Rate
  Average
Balance

  Interest
Income/
Expense

  Rate
  Average
Balance

  Interest
Income/
Expense

  Rate
 
Assets                                                  
Interest-earning assets:                                                  
Loans:                                                  
  Commercial   $ 49,780   $ 893   7.18 % $ 53,237   $ 1,115   8.38 % $ 33,601   $ 821   9.77 %
  Real estate—commercial     94,614     1,887   7.98 %   77,165     1,673   8.67 %   33,901     633   7.47 %
  Real estate—construction     6,675     100   5.96 %   6,044     127   8.40 %   3,373     85   10.12 %
  Real estate—residential     19,103     369   7.72 %   17,864     384   8.59 %   19,746     460   9.33 %
  Home equity lines     24,268     263   4.30 %   18,755     287   6.12 %   8,253     183   8.85 %
  Consumer     11,884     225   7.51 %   14,911     293   7.86 %   9,635     216   8.95 %
   
 
     
 
     
 
     
    Total loans     206,324     3,737   7.24 %   187,976     3,879   8.25 %   108,509     2,398   8.84 %
   
 
     
 
     
 
     
Investment securities available for sale     127,307     1,471   4.62 %   5,788     95   6.57 %   6,310     99   6.30 %
Other investments     1,199     17   5.67 %   1,319     22   6.67 %   1,036     16   6.24 %
Federal funds sold     62,104     260   1.66 %   25,168     218   3.44 %   22,906     391   6.85 %
   
 
     
 
     
 
     
Total interest-earning assets and interest income     396,934     5,485   5.53 %   220,251     4,214   7.65 %   138,761     2,904   8.37 %
         
           
           
     
Non-interest earning assets:                                                  
Cash and due from banks     19,861               10,706               5,711            
Premises and equipment, net     4,678               5,572               4,678            
Goodwill and other intangibles     646               9,167               3,300            
Accrued interest and other assets     3,500               1,836               687            
Allowance for loan losses     (3,049 )             (2,138 )             (1,278 )          
   
           
           
           
Total assets   $ 422,570             $ 245,394             $ 151,859            
   
           
           
           
Liabilities and Shareholders' Equity                                                  
Interest—bearing liabilities:                                                  
Interest—bearing deposits:                                                  
  Interest checking     130,110     904   2.76 %   16,128     74   1.84 %   6,244     33   2.10 %
  Money markets     32,019     151   1.87 %   26,350     185   2.82 %   16,169     136   3.37 %
  Statement savings     4,287     13   1.24 %   4,502     24   2.16 %   2,216     16   2.97 %
  Certificates of deposit     150,658     1,535   4.04 %   103,439     1,420   5.51 %   62,115     966   6.24 %
   
 
     
 
     
 
     
    Total interest—bearing deposits     317,074     2,603   3.26 %   150,419     1,703   4.49 %   86,744     1,151   5.32 %
   
 
     
 
     
 
     
Other borrowed funds     4,065     40   3.93 %   10,912     122   4.45 %   6,875     117   6.83 %
   
 
     
 
     
 
     
Total interest-bearing liabilities and interest expense     321,139     2,643   3.27 %   161,331     1,825   4.50 %   93,619     1,268   5.43 %
         
           
           
     
Noninterest-bearing liabilities:                                                  
Demand deposits     60,161               49,337               27,053            
Other liabilities     1,659               2,500               1,169            
Preferred shareholders' equity     6,825               7,057               2,378            
Common shareholders' equity     32,786               25,169               27,640            
   
           
           
           
Total liabilities and shareholders' equity   $ 422,570             $ 245,394             $ 151,859            
   
           
           
           
Net interest income and net interest margin         $ 2,842   2.86 %       $ 2,389   4.34 %       $ 1,636   4.72 %
         
           
           
     

18


Table 4a.

Cardinal Financial Corporation and Subsidiaries
Rate and Volume Analysis (Tax Equivalent Basis)
(Dollars in thousands)

 
  Three Months Ended September 30,
2002 Compared to 2001

  Three Months Ended September 30,
2001 Compared to 2000

 
 
  Average
Volume

  Average
Rate

  Increase
(Decrease)

  Average
Volume

  Average
Rate

  Increase
(Decrease)

 
Interest income:                                      
Loans:                                      
  Commercial   $ (72 ) $ (150 ) $ (222 ) $ 480   $ (186 ) $ 294  
  Real estate—commercial     379     (165 )   214     808     232     1,040  
  Real estate—construction     14     (41 )   (27 )   68     (26 )   42  
  Real estate—residential     27     (42 )   (15 )   (43 )   (33 )   (76 )
  Home equity lines     84     (108 )   (24 )   234     (130 )   104  
  Consumer     (60 )   (8 )   (68 )   119     (42 )   77  
   
 
 
 
 
 
 
    Total loans     372     (514 )   (142 )   1,666     (185 )   1,481  
   
 
 
 
 
 
 
Investment securities available for sale     1,995     (619 )   1,376     (8 )   4     (4 )
Other investments     (2 )   (3 )   (5 )   5     1     6  
Federal funds sold     321     (279 )   42     39     (212 )   (173 )
   
 
 
 
 
 
 
  Total interest income     2,686     (1,415 )   1,271     1,702     (392 )   1,310  
Interest expense:                                      
Interest—bearing deposits:                                      
  Interest checking     527     303     830     52     (11 )   41  
  Money markets     40     (74 )   (34 )   87     (38 )   49  
  Statement savings     (1 )   (10 )   (11 )   17     (9 )   8  
  Certificates of deposit     656     (541 )   115     650     (196 )   454  
   
 
 
 
 
 
 
    Total interest—bearing deposits     1,222     (322 )   900     806     (254 )   552  
   
 
 
 
 
 
 
Other borrowed funds     (77 )   (5 )   (82 )   69     (64 )   5  
  Total interest expense     1,145     (327 )   818     875     (318 )   557  
   
 
 
 
 
 
 
Net interest income   $ 1,541   $ (1,088 ) $ 453   $ 827   $ (74 ) $ 753  
   
 
 
 
 
 
 

19


Table 5.

Cardinal Financial Corporation and Subsidiaries
Average Balance Sheets and Interest Rates on Earning Assets and Interest—Bearing Liabilities
For the Nine Months Ended September 30, 2002, 2001 and 2000
(Dollars in thousands)

 
  2002
  2001
  2000
 
 
  Average
Balance

  Interest
Income/
Expense

  Rate
  Average
Balance

  Interest
Income/
Expense

  Rate
  Average
Balance

  Interest
Income/
Expense

  Rate
 
Assets                                                  
Interest-earning assets:                                                  
Loans:                                                  
  Commercial   $ 52,156   $ 2,788   7.13 % $ 50,710   $ 3,345   8.80 % $ 27,978   $ 1,996   9.51 %
  Real estate—commercial     89,634     5,408   8.04 %   67,475     4,445   8.78 %   30,020     1,696   7.53 %
  Real estate—construction     6,185     282   6.07 %   5,538     374   9.01 %   1,990     146   9.78 %
  Real estate—residential     17,448     1,033   7.90 %   18,062     1,133   8.36 %   15,068     1,012   8.96 %
  Home equity lines     23,270     741   4.26 %   17,172     896   6.96 %   6,078     393   8.62 %
  Consumer     12,864     715   7.43 %   14,965     881   7.85 %   9,428     566   8.01 %
   
 
     
 
     
 
     
    Total loans     201,557     10,967   7.26 %   173,922     11,074   8.49 %   90,562     5,809   8.55 %
   
 
     
 
     
 
     
Investment securities available for sale     91,846     3,284   4.77 %   5,325     285   7.14 %   5,136     243   6.30 %
Other investments     1,197     53   5.90 %   1,427     66   6.17 %   971     49   6.68 %
Federal funds sold     49,428     613   1.66 %   27,223     926   4.55 %   19,245     961   6.66 %
   
 
     
 
     
 
     
Total interest-earning assets and interest income     344,028     14,917   5.78 %   207,897     12,351   7.92 %   115,914     7,062   8.12 %
         
           
           
     
Non-interest earning assets:                                                  
Cash and due from banks     16,955               10,207               4,499            
Premises and equipment, net     4,843               5,649               4,496            
Goodwill and other intangibles     652               9,337               1,108            
Accrued interest and other assets     2,003               1,723               1,209            
Allowance for loan losses     (3,051 )             (2,038 )             (999 )          
   
           
           
           
Total assets   $ 365,430             $ 232,775             $ 126,227            
   
           
           
           
Liabilities and Shareholders' Equity                                                  
Interest—bearing liabilities:                                                  
Interest—bearing deposits:                                                  
  Interest checking     104,351     2,252   2.89 %   14,188     203   1.93 %   4,264     73   2.32 %
  Money markets     28,229     424   2.01 %   24,485     617   3.39 %   12,666     336   3.57 %
  Statement savings     4,275     40   1.24 %   4,396     88   2.70 %   1,096     26   3.23 %
  Certificates of deposit     131,106     4,118   4.20 %   99,781     4,427   5.98 %   48,564     2,193   6.08 %
   
 
     
 
     
 
     
    Total interest—bearing deposits     267,961     6,834   3.41 %   142,850     5,335   4.99 %   66,590     2,628   5.31 %
   
 
     
 
     
 
     
Other borrowed funds     6,802     208   4.09 %   9,817     368   5.02 %   6,261     309   6.55 %
   
 
     
 
     
 
     
Total interest-bearing liabilities and interest expense     274,763     7,042   3.43 %   152,667     5,703   5.00 %   72,851     2,937   5.43 %
         
           
           
     
Noninterest-bearing liabilities:                                                  
Demand deposits     57,915               44,566               21,517            
Other liabilities     2,505               2,593               1,917            
Preferred shareholders' equity     6,825               7,057               798            
Common shareholders' equity     23,422               25,892               29,144            
   
           
           
           
Total liabilities and shareholders' equity   $ 365,430             $ 232,775             $ 126,227            
   
           
           
           
Net interest income and net interest margin         $ 7,875   3.05 %       $ 6,648   4.26 %       $ 4,125   4.74 %
         
           
           
     

20


Table 5a.

Cardinal Financial Corporation and Subsidiaries
Rate and Volume Analysis (Tax Equivalent Basis)
(Dollars in thousands)

 
  Nine Months Ended September 30,
2002 Compared to 2001

  Nine Months Ended September 30,
2001 Compared to 2000

 
 
  Average
Volume

  Average
Rate

  Increase
(Decrease)

  Average
Volume

  Average
Rate

  Increase
(Decrease)

 
Interest income:                                      
Loans:                                      
  Commercial   $ 95   $ (652 ) $ (557 ) $ 1,622   $ (273 ) $ 1,349  
  Real estate—commercial     1,460     (497 )   963     2,116     633     2,749  
  Real estate—construction     44     (136 )   (92 )   260     (32 )   228  
  Real estate—residential     (39 )   (61 )   (100 )   202     (81 )   121  
  Home equity lines     317     (472 )   (155 )   715     (212 )   503  
  Consumer     (123 )   (43 )   (166 )   332     (17 )   315  
   
 
 
 
 
 
 
    Total loans     1,754     (1,861 )   (107 )   5,247     18     5,265  
   
 
 
 
 
 
 
Investment securities available for sale     4,631     (1,632 )   2,999     9     33     42  
Other investments     (11 )   (2 )   (13 )   23     (6 )   17  
Federal funds sold     755     (1,068 )   (313 )   397     (432 )   (35 )
   
 
 
 
 
 
 
  Total interest income     7,129     (4,563 )   2,566     5,676     (387 )   5,289  
Interest expense:                                      
Interest—bearing deposits:                                      
  Interest checking     1,300     749     2,049     172     (42 )   130  
  Money markets     95     (288 )   (193 )   315     (34 )   281  
  Statement savings     (2 )   (46 )   (48 )   80     (18 )   62  
  Certificates of deposit     1,400     (1,709 )   (309 )   2,329     (95 )   2,234  
   
 
 
 
 
 
 
    Total interest—bearing deposits     2,793     (1,294 )   1,499     2,896     (189 )   2,707  
   
 
 
 
 
 
 
Other borrowed funds     (113 )   (47 )   (160 )   174     (115 )   59  
  Total interest expense     2,680     (1,341 )   1,339     3,070     (304 )   2,766  
   
 
 
 
 
 
 
Net interest income   $ 4,449   $ (3,222 ) $ 1,227   $ 2,606   $ (83 ) $ 2,523  
   
 
 
 
 
 
 

21


Table 6.

Cardinal Financial Corporation and Subsidiaries
Allowance for Loan Losses
For the Nine Months Ended September 30, 2002 and 2001
(Dollars in thousands)

 
  2002
  2001
Beginning balance, January 1   $ 3,104   $ 1,900
Provision for loan losses     134     375
Transfer to bank's liability on unfunded commitments     (74 )  
Loans charged off:            
  Commercial     (63 )  
  Real estate—commercial        
  Real estate—construction        
  Real estate—residential        
  Home equity lines        
  Consumer     (41 )  
   
 
  Total loans charged off     (104 )  

Recoveries:

 

 

 

 

 

 
  Commercial     2     2
  Real estate—commercial        
  Real estate—construction        
  Real estate—residential        
  Home equity lines        
  Consumer     11    
   
 
  Total recoveries     13     2

Net (charge-offs) recoveries

 

 

(91

)

 

2
Ending balance   $ 3,073   $ 2,277
   
 

 

 

September 30,
2002


 

September 30,
2001


 
Loans:              
  Balance at period end   $ 216,337   $ 196,668  
  Allowance for loan losses to period end loans receivable     1.42 %   1.16 %

22


Table 7.

Cardinal Financial Corporation and Subsidiaries
Allocation of the Allowance for Loan Losses
As of September 30, 2002 and December 31, 2001
(Dollars in thousands)

 
  September 30,
2002

  December 31,
2001

 
  Amount
  % of Total*
  Amount
  % of Total*
Commercial   $ 948   24.37%   $ 1,149   28.71%
Real estate—commercial     1,342   44.24%     1,270   43.37%
Real estate—construction     173   2.88%     34   3.18%
Real estate—residential     190   11.71%     98   7.20%
Home equity lines     198   11.45%     176   10.60%
Consumer     222   5.35%     377   6.94%
   
 
 
 
Total allowance for loan losses   $ 3,073   100.00%   $ 3,104   100.00%
   
 
 
 

*
Percentage of loan type to the total loan portfolio.

23


Table 8.

Cardinal Financial Corporation and Subsidiaries
Capital Components
As of September 30, 2002 and December 31, 2001
(Dollars in thousands)

 
  Actual
  For Capital
Adequacy Purposes

  To Be Well Capitalized Under Prompt Corrective Action Provisions
 
 
  Amount
  Ratio
  Amount
   
  Ratio
  Amount
   
  Ratio
 
As of September 30, 2002                                        
Total risk based capital/ Total capital to risk-weighted assets   $ 40,708   15.21 % $ 21,407   ³   8.00 % $ 26,759   ³   10.00 %
Tier I capital/ Tier I capital to risk-weighted assets     37,636   14.06 %   10,704   ³   4.00 %   16,055   ³   6.00 %
Total risk based capital/ Total capital to average assets     40,708   9.63 %   16,903   ³   4.00 %   13,380   ³   5.00 %

 
As of December 31, 2001                                        
Total risk based capital/ Total capital to risk-weighted assets   $ 23,333   10.42 % $ 17,909   ³   8.00 % $ 22,387   ³   10.00 %
Tier I capital/ Tier I capital to risk-weighted assets     20,230   9.04 %   8,955   ³   4.00 %   13,432   ³   6.00 %
Total risk based capital/ Total capital to average assets     23,333   8.57 %   10,891   ³   4.00 %   13,614   ³   5.00 %

24


Table 9.

Cardinal Financial Corporation and Subsidiaries
Interest Rate Sensitivity Gap Analysis
As of September 30, 2002
(Dollars in thousands)

 
  Immediate
Repricing

  2-90
Days

  91-180
Days

  181-365
Days

  1-3
Years

  Over 3
Years

  TOTAL
Assets                                          
Investment securities available-for-sale and other investments   $   $ 7,382   $ 6,018   $ 13,009   $ 65,206   $ 47,593   $ 139,208
   
 
 
 
 
 
 
Federal funds sold     61,186                         61,186
   
 
 
 
 
 
 
Loans                                          
Commercial & industrial     15,152     5,761     3,722     8,358     45,320     70,102     148,416
Residential     108     249     294     2,129     7,821     14,729     25,329
Home equity lines     4,471     20,305                     24,776
Construction     4,770     13     6     12     55     1,368     6,224
All other     1,706     555     397     711     2,416     5,806     11,592
   
 
 
 
 
 
 
Total Gross Loans     26,207     26,884     4,420     11,210     55,612     92,005     216,337
   
 
 
 
 
 
 
Total Earning Assets     87,393     34,266     10,438     24,219     120,818     139,598     416,731
   
 
 
 
 
 
 
Cumulative Rate Sensitive Assets     87,393     121,659     132,097     156,315     277,133     416,731      
   
 
 
 
 
 
 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Deposits                                          
Noninterest-bearing demand                         73,474     73,474
Interest-bearing transaction accounts     33,666     16,833     16,833     16,833     16,833     67,332     168,331
Certificates of deposit—fixed     104     8,611     5,487     22,485     50,451     16,209     103,347
Certificates of deposit—no penalty     116     7,395     9,973     16,404     24,628         58,516
   
 
 
 
 
 
 
Total Deposits     33,886     32,839     32,293     55,722     91,912     157,015     403,668
   
 
 
 
 
 
 
Other borrowed funds                 1,000             1,000
   
 
 
 
 
 
 
Total Deposits & Other Borrowed Funds     33,886     32,839     32,293     56,722     91,912     157,015     404,668
   
 
 
 
 
 
 
Cumulative Rate Sensitive Liabilities   $ 33,886   $ 66,725   $ 99,018   $ 155,741   $ 247,653   $ 404,668      
   
 
 
 
 
 
 

Gap

 

$

53,507

 

$

1,427

 

$

(21,855

)

$

(32,504

)

$

28,906

 

$

(17,417

)

 

 
Cumulative Gap     53,507     54,934     33,079     575     29,480     12,063      
Gap/ Total Assets     11.98 %   0.32 %   -4.89 %   -7.27 %   6.47 %   -3.90 %    
Cumulative Gap/ Total Assets     11.98 %   12.29 %   7.40 %   0.13 %   6.60 %   2.70 %    
Rate Sensitive Assets/ Rate Sensitive Liabilities     2.58 x   1.04 x   0.32 x   0.43 x   1.31 x   0.89 x    
Cumulative Rate Sensitive Assets/ Rate Sensitive Liabilities     2.58 x   1.82 x   1.33 x   1.00 x   1.12 x   1.03 x    

25



Item 3. Controls and Procedures

        Based upon an evaluation by our Chief Executive Officer and Chief Financial Officer within 90 days prior to the filing date of this Quarterly Report on Form 10-QSB, they have concluded that our disclosure controls and procedures, as defined in Rule 13a-14(c) under the Securities Exchange Act of 1934, as amended, are effective in ensuring that all material information required to be filed in this Quarterly Report has been made known to them in a timely fashion.

        There were no significant changes in our internal controls or in other factors that could significantly affect internal controls subsequent to the date of the evaluation referred to above.

26



Part II—Other Information

        Item 1. Legal Proceedings

        From time to time, the Company is a party to legal proceedings in the ordinary course of business. However, the Company is not engaged in any legal proceedings of a material nature at the present time.


        Item 2. Changes in Securities


        Item 3. Defaults Upon Senior Securities


        Item 4. Submission of Matters to a Vote of Security Holders

 
   
  Votes
Director

  Term Expires
  For
  Withheld
Nancy K. Falck   2003   8,255,864   178,602
J. Hamilton Lambert   2003   8,214,501   219,965

Jones V. Isaac

 

2004

 

8,288,364

 

146,102

B.G. Beck

 

2005

 

8,288,364

 

146,102
William G. Buck   2005   8,288,364   146,102
Bernard H. Clineburg   2005   8,288,364   146,102
John W. Fisher   2005   8,255,864   178,602
Emad Saadeh   2005   8,288,364   146,102
Director

  Term Expires
Robert M. Barlow   2003
James D. Russo   2003
George P. Shafran   2003
Wayne W. Broadwater   2004
Sidney O. Dewberry   2004
Harold E. Lieding   2004
John H. Rust   2004

        The approval of the Cardinal Financial Corporation 2002 Equity Compensation Plan was voted on at the meeting and approved by a vote of 4,507,317 for, 445,230 against, with 605,135 abstentions.

27



        Finally, the shareholders voted on and approved the appointment of KPMG LLP as the Company's independent auditors by a vote of 8,415,648 for, 15,730 against, with 3,088 abstentions.


Item 5. Other Information

        None


Item 6. Exhibits and Reports on Form 8-K

        3.1  Articles of Incorporation of Cardinal Financial Corporation (incorporated by reference to Exhibit 3.1 to the Registration Statement on Form SB-2, Registration No. 333-82946, filed with the Commission on February 19, 2002 (the "Original Form SB-2")).

        3.2  Articles of Amendment to the Articles of Incorporation of Cardinal Financial Corporation, setting forth the designation for the Series A Preferred Stock and other changes (incorporated by reference to Exhibit 3.2 to the Original Form SB-2) and Articles of Amendment to the Articles of Incorporation of Cardinal Financial Corporation, further setting forth the designation for the Series A Preferred Stock and other changes (incorporated by reference to Exhibit 3.2 to the Pre-Effective Amendment No. 1 to Form SB-2, Registration No. 333-82946, filed with the Commission on March 21, 2002 ("Amendment No. 1")).

        3.3  Amended Bylaws of Cardinal Financial Corporation (incorporated by reference to Exhibit 3.3 to the Form 10-QSB filed with the Commission on August 14, 2002).

        4.1  Form of Common Stock Certificate (incorporated by reference to Exhibit 4.1 to the Original Form SB-2).

        10.1 Employment Agreement, dated as of February 12, 2002, between Cardinal Financial Corporation and Bernard H. Clineburg (incorporated by reference to Exhibit 10.1 to the Original Form SB-2).

        10.2 Executive Employment Agreement, dated as of February 12, 2002, between Cardinal Financial Corporation and Carl E. Dodson (incorporated by reference to Exhibit 10.2 to the Original Form SB-2).

        10.3 Executive Employment Agreement, dated as of February 12, 2002 between Cardinal Financial Corporation and F. Kevin Reynolds (incorporated by reference to Exhibit 10.4 to the Original Form SB-2).

        10.4 Executive Employment Agreement, dated as of February 12, 2002, between Cardinal Financial Corporation and Christopher W. Bergstrom (incorporated by reference to Exhibit 10.5 to the Original Form SB-2).

        10.5 Cardinal Financial Corporation 1999 Stock Option Plan, as amended (incorporated by reference to Exhibit 10.7 to the Original Form SB-2).

        10.6 Cardinal Financial Corporation 2002 Equity Compensation Plan (incorporated by reference to Exhibit 10.8 to the Form 10-QSB filed with the Commission on August 14, 2002).

        99.1 Certification by Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

        99.2 Certification by Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

        On July 8, 2002 the registrant filed a Report on Form 8-K attaching its July 3, 2002 press release concerning a writedown of a Worldcom bond.

28



SIGNATURES

        Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Report on Form 10-QSB to be signed on its behalf by the undersigned thereunto duly authorized.

    CARDINAL FINANCIAL CORPORATION
(Registrant)

Date: November 14, 2002

 

/s/  
BERNARD H. CLINEBURG      
Bernard H. Clineburg
Chairman, President and
Chief Executive Officer

Date: November 14, 2002

 

/s/  
JOHN P. HOLLERBACH      
John P. Hollerbach
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)

29



CERTIFICATION

        I, Bernard H. Clineburg, Chief Executive Officer of the registrant, certify that:

        1.    I have reviewed this quarterly report on Form 10-QSB of Cardinal Financial Corporation;

        2.    Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

        3.    Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

        4.    The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

        5.    The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):

        6.    The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

November 14, 2002   /s/  BERNARD H. CLINEBURG      
Bernard H. Clineburg,
Chairman, President and
Chief Executive Officer

30



CERTIFICATION

        I, John P. Hollerbach, Chief Financial Officer of the registrant, certify that:

        1.    I have reviewed this quarterly report on Form 10-QSB of Cardinal Financial Corporation;

        2.    Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

        3.    Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

        4.    The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

        5.    The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):

        6.    The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

November 14, 2002   /s/  JOHN P. HOLLERBACH      
John P. Hollerbach,
Executive Vice President and
Chief Financial Officer

31




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CARDINAL FINANCIAL CORPORATION
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